A Redundant Subsidy

Even if you are a staunch proponent of U.S. biofuel policy, it is hard to argue that the current subsidy on grain ethanol serves the purpose it was designed to serve. Further, it does not help ethanol producers compete against oil companies. Why? Because we now have mandates. As I will explain here, this nullifies the purpose of the subsidy.

But first, how did we get to this point? In an effort to spur development of a domestic renewable fuel industry and wean the U.S. off of foreign oil, the U.S. government introduced tax credits for ethanol usage with the Energy Tax Act of 1978. The tax credit was an exemption to the Federal Excise Tax on gasoline, and amounted to $0.40 for every gallon of ethanol blended into gasoline at the 10% level (increased to $0.60 per gallon in 1984 and gradually decreased to the current level of $0.45 per gallon).

(Note: This was also published to Forbes' energy blog.)

During the 1980s, the subsidies were increased, government-backed-loans were provided to ethanol producers for plant construction, and an import fee was implemented to help protect domestic ethanol producers from cheap imports. Despite these measures, the ethanol industry struggled to make headway. The majority of the ethanol plants that were built in the early 1980s were out of business by the mid-80s.

However, the plants that were able to stay in business increased production from under 200 million gallons per year in 1980 to 900 million gallons in 1990. Production slowly continued to grow, reaching 1.6 billion gallons by 2000 and 3.9 billion gallons by 2005. However, there were still two glaring problems at that point.

First, while production had grown substantially over the years, it still amounted to a tiny fraction of U.S. gasoline demand. As ethanol production expanded by 3 billion gallons per year from 1990 to 2005, U.S. gasoline demand grew by 30 billion gallons – to 140 billion gallons per year. Petroleum imports grew by 5.7 million barrels per day (87 billion gallons per year). Clearly, if the purpose of U.S. biofuel policy was to reduce dependence on petroleum imports, ethanol was at best having very little impact.

The second glaring problem was that ethanol could not compete head-to-head with gasoline on price. The state of Nebraska has tracked gasoline and ethanol prices since 1982, and despite all the financial incentives for ethanol, the average annual price of ethanol had exceeded the price of gasoline in every single year on record through 2005. (See Ethanol and Unleaded Gasoline Average Rack Prices). Not only was ethanol more expensive on a per gallon basis, but since it contains only 2/3rds the energy content of gasoline, consumers would find themselves filling up more frequently when using ethanol blends.

The result was that the cost per mile for consumers on the ethanol component of their fuel was double or even triple the cost of the gasoline component. However, with a 10% blend, the impact of the higher cost was diluted such that it was likely not obvious to most consumers. But for gasoline blenders, ethanol at equal to or higher than the cost per gallon of gasoline was not a price that would compel them to buy ethanol.

So the U.S. government decided to force the issue by mandating ethanol usage in the Energy Policy Act of 2005. The mandate started with 4 billion gallons of ethanol in 2006 – just about the amount that was being produced at that time - and initially increased each year to 7.5 billion gallons of ethanol by 2012. An ethanol gold rush ensued, capacity was overbuilt, and suddenly the industry found itself in deep financial trouble as ethanol supply exceeded the mandates.

Again, the government rode to the rescue by accelerating the mandates in the Energy Independence and Security Act of 2007. Instead of mandating 7.5 billion gallons of ethanol in the fuel supply by 2010, the new mandate was for 12 billion gallons in 2010 and 15 billion gallons by 2015. But one thing Congress did not do was eliminate the ethanol subsidy. This begs the question, “If there is a mandate in place, what is the purpose of the subsidy?” The original intent was of course to give a boost to ethanol producers who were trying to compete with gasoline, which was the entrenched contender. However, producers no longer need that boost because gasoline blenders have to buy the ethanol whether they like it or not.

As many ethanol producers have argued – the gasoline blender and not the ethanol producer receives the subsidy anyway. The gasoline blender – ExxonMobil for instance – buys ethanol for $1.70 per gallon (currently), receives a tax credit worth $0.45 per gallon (the credit was reduced to that level in 2009), and then blends it into gasoline that is presently wholesaling at approximately $1.90 per gallon. With the tax credit, the current price of ethanol on an energy equivalent basis to gasoline is just about equal to the $1.90 wholesale price of gasoline. So the tax credit compensates the gasoline blender for blending in a higher cost feedstock.

But what if the tax credit were not there? Would ExxonMobil blend less ethanol? No, they are mandated to blend a certain amount, and if they fail to do so they are penalized. So in the event that they did not get the tax credit, then the energy equivalent price they would pay for ethanol would be about $2.50 per gallon (based on ethanol’s current spot price). At a 10% blend, this would mean that at current prices the price charged for a gallon of ethanol-blended-gasoline would need to rise about six cents to keep the gasoline blender’s costs equivalent to the cost they currently have with the tax credit in place. The only difference would be that the cost would then be borne directly by drivers in proportion to the number of miles they drive.

In my view, the ethanol subsidy is now redundant with the mandates in place. Removing the subsidy would shift the burden from all taxpayers – regardless of whether or how much they drive – proportionally to those who are using the fuel. Further, elimination of the administration of the subsidy would net two additional benefits.

There would be some efficiency and cost savings as the government got out of the business of administering the program and processing payments for gasoline blenders for the ethanol they use. And because of the slight rise in fuel prices (which should be more than compensated for by the savings from eliminating the subsidy), a small amount of fuel conservation may result. This would have the benefit of actually having some small impact on our petroleum imports.

Even if you are solidly in favor of U.S. biofuel policy, with a mandate in place none of the usual arguments apply. The old argument that “oil companies get subsidies, and therefore so should ethanol producers” is irrelevant. With the mandate, the ethanol company isn’t competing with the oil company, because the oil company has to buy the product. The ethanol company is essentially competing against other ethanol companies for the blender’s business. So let’s eliminate this redundant subsidy, put the burden of our biofuel policy where it belongs, and save a few tax dollars in the process.


Yoor argument is perfectly sound, clear as crystal, and very easily understood-to anybody who will take the time to read and study it.

Unfortunately I believe that whileyou have done a very creditable job of making your point, neither you nor any one else is likely to succeed in reducing it to a sound bite.

And unfortunately we live in as Debbie Cook puts it,a society in which policy is made on the basis of relationships rather than facts.

I'll bet that she would have added something about soundbites being essential to the current policy making process had she written a longer post a yesterday.

" The old argument that “oil companies get subsidies, and therefore so should ethanol producers” is irrelevant. With the mandate, the ethanol company isn’t competing with the oil company, because the oil company has to buy the product."

What are the subsidies that oil companies receive. Are all of these "so called" subsidies truly subsidies? Were there other oil company subsidies in past decades? What are some of the the subsidies for other energy producers, geothermal and nuclear for example. Are there other mandates?

RR doesn't care about subsidies to other forms of energy, only ethanol. He should not worry too much about it since the blenders credit is set to expire on December 31, 2010. I think that is fine as long as all other energy subsidies also expire.


RR likes compressed natural gas for vehicle power. So do I. Let's see how far that gets without government subsidies and mandates. Oil man Boone Pickens wants $65,000 per rig to convert 8 million semi's to natural gas when last I heard diesel was in surplus and we export it to Europe. If all the 8 million were converted to compressed natural gas, we would have to export even more diesel. And the cost would be 520 billion dollars, over a half trillion. The current ethanol subsidy of about $6 billion would take nearly 90 years to run up that amount, yet Pickens has the balls to ask for it and call ethanol a stupid fuel.

There are two kinds of mandates government and structural. The in place vehicular structural mandate is the stronger. It mandates gasoline for the most part and gasoline needs an oxygenate to reduce pollution. We are not going back to MTBE made from natural gas. Ethanol is now the mandated oxygenate and that is not going to change.

I would love to see all liquid fuel subsidies eliminated, but until that happens the ethanol subsidy will need to be renewed come the end of the year.

X, Apparently you know even less about chemistry and auto mechanics than you do economics.
(Actually some of your comments are good enough that I strogly suspect that you know the score on ethanol too , but are dissembling in order to protect your livelihood.)

Any major auto publication such as Car and Driver , etc, has this info in the relevant back issues:

There are not a whole lot of gasoline vehicles left on the road (and they grow fewer every day) which don't have sophisticated computer controlled fuel/ air mixture features..There is plenty of oxygen in the atmosphere to burn gasoline.

The "oxygenate issue" meant something temporarily in just squeezing by air pollution limits in some cities when the auto fleet was much older and most cars had carburetors or at best unsophisticated fuel injection systems.It is entirely irrelevant now.

RR doesn't care about subsidies to other forms of energy, only ethanol.

And our resident corn farmer isn't really interested in telling the truth. The fact is that I am fine with subsidies as long as they are distributed evenly. I don't believe we pay the true costs for oil usage, so I would strongly support raising our fossil fuel costs. That would subsidize all renewable options evenly without picking a technology winner. What I am staunchly opposed to is saying "We think this is the winner, so let's funnel money there."

But you have missed the point. With the mandate, there is no need for the subsidy. It serves no purpose whatsoever to the ethanol industry.

Huh, a whole blog dedicated to the Blender’s Tax Credit.

The GAO report estimates the cost to the Treasury of the ethanol blenders' credit at $4 billion last year, growing to $6.75 billion by 2015, if not sooner.

Energy Outlook

U.S. GAO - Biofuels: Potential Effects and Challenges of Required Increases in Production and Use

Domestic Ethanol Production and Federal Tax Expenditures, 1980-2008:

Domestic Ethanol Production and Federal Tax Expenditures, 1980-2008

Subsidizing renewables evenly/fairly is difficult.

New nukes get the wind subsidy (the first six new nukes) PLUS much, much more (like gov't financing, cost over run protection, free insurance, etc.).

But compare wind, geothermal and landfill gas. Different production characteristics (landfill gas is base load only, and slowly declines, geothermal is base load with an option for limited peaking, wind is erratic and typically winter peaking. ATM, all get the same kWh subsidy.

Landfill gas slowly declines after closure. Geothermal lasts for decades but if fully exploited will "deplete" and then likely renew itself after decades more. Wind is infinitely renewable.

Given the differences, one could argue for a slightly higher subsidy for geothermal than wind, especially if it is designed for load following (or matching wind). ATM, the subsidies push geothermal to be strictly base load w/o load following.

If landfill gas is not burned, it releases methane. A short lived but potent GHG. A mandate exists for larger landfills to burn as much methane as possible. Some brick kilns use landfill gas, the other options are flaring or running a diesel generator with it. Should we subsidize what we mandate ? Should we subsidize electrical generation but not brick kilns ?

Best Hopes for Good Policies,


I'm glad that X brought up MTBE, and surprised that no one else has mentioned it in their posts.

As far as I'm concerned, the fact that MTBE is a serious ground-water pollutant and ethanol is not, there is at least an environmental argument for using ethanol as an anti-knock compound. Although this was not the original purpose for the great ethanol subsidy, it is nice that at least something positive has come out of it.

So no, ethanol will not make the USA energy independent. But at least it will make US produced gasoline cleaner.

At guess we can take solace from that.

As far as I'm concerned, the fact that MTBE is a serious ground-water pollutant and ethanol is not, there is at least an environmental argument for using ethanol as an anti-knock compound.

Very few vehicles - especially newer ones - have any requirement for an oxygenate. So there is some value there, but it isn't much.

Proportionately, the subsidies are a whole lot higher for so-called renewables than they are for fossil fuels--even if you consider the cost of things like the Iraq war. I know Robert Rapier has some numbers on this. Hopefully he will be able to check in--being in Hawaii, his time zone is different.

In this post, I show someone's calculation of the effective tax rates of different energy sources, as of early 2009:

The tax rates that are negative are a give-back, rather than a tax, so wind, solar, and nuclear are operating very much in the subsidy range. The IGCC coal with the lower tax rate is the one that is being encouraged because it might work for carbon capture and storage. Even though its rate is lower, little is being built because it is so much more expensive.

The oil drilling non-integrated gets the biggest breaks. These include the stripper wells and other smaller operations. I would expect these lower effective tax rates would extend to natural gas companies like Chesapeake, but I could be wrong on this. The tax on the "major" would be as indicated by the "integrated" tax rate.

even if you consider the cost of things like the Iraq war.

Simply not so.

We are several decades away from knowing the full cost of the Iraq War, so how can one include the cost ?

And we are over a century away from knowing the cost of the subsidies given to coal fired power by giving them FREE rights to alter our climate. All for ZERO up front costs but many tens of trillions in later costs to agriculture, infrastructure, disease, lost real estate, etc.

Coal fired electricity is getting a staggering public subsidy, many times any other source of power. No other subsidy is worth noting, they are rounding errors in the subsidy for coal fired electricity (except NG).

Best Hopes for Better Accounting,


PS: It takes about 40 years for one gigaton of CO2 (about 2 months worth) added to our atmosphere to reach thermal equilibrium (i.e. for the direct heating from greenhouse effects to become fully apparent).

I assume you're not stating that you're uninterested in what we are subsidizing, irrespective of what we think proper expenditures are. So what are we subsidizing? Finding this simple bit of information is one of those topics that is surprisingly daunting to research, given that an undue amount of weight on the Net is directed towards energy subsidy, thus most of your hits are for stuff like this from the NRDC:

Luckily the Pew Charitable Trusts are on the job: Subsidyscope.com. Hah, they have sections dedicated to Transportation and "Bailouts" but "Energy" is still in the works.

Economic Sector Total Sector DGP Percent of Sector GDP ($ billions) That Is Federal Expenditures (%)
Energy 526 4.0
Transportation 1,496 5.2
Housing 2,321 10.5
Agriculture 371 23.5
Nonprofit 304 26.2
Health 2,009 43.5
Sources include: BEA, 2007; Census of County Business Patterns 2006; IRS Statistics of Income 2006; OMB FY09 Budget 2008.

Hmm, is the blender's credit energy or transportation? How much of the total budget does it account for? Info from this PDF: Government Subsidies: Revealing the Hidden Budget.

It is a huge waste. In so many cases, the FedGov subsidizes one thing, then it subsidizes its opposite to cancel out. For example, for years the FedGov was subsidizing tobacco growers at the same time that is was subsidizing anti-smoking campaigns.

IMHO, we need to get rid of all the subsidies - every single one, explicit or implicit.

This does not mean that I believe that the market, left to its own devices, is going to make all things well. However, the way things stand right now, nobody has the slightest idea what the market really is, given the massive distortions caused by massive subsidization.

I actually agree with R^2. The real losers if the subsidies go will be the refineries. But I would keep the subsidy for cellulosic ethanol, as it needs to get up and running.

Majorian, how on earth do you arrive at this conclusion `?

The real losers if the subsidies go will be the refineries

If all refiners are mandated to blend in the same amount of ethanol at say .5 dollar/gallon, I can assure you that they will push this very cost onto the next link in the chain , plus a minor handling fee.. Nothing lost there according to my brain.

So the purpose of subsidies is to keep consumer prices low?

The 45 cent per gallon subsidy indirectly supports the price of a bushel of corn (and crops that compete for land like soybeans) and higher prices stimulates the production of corn. Over the last 10 years the production of ethanol has increased 5 fold. But we don't need much more corn ethanol as the federal mandate of 15 billion gallons per year are in sight.

A subsidy for cellulosic ethanol will stimulate the production of non-food energy crops like switchgrass and miscanthus, decoupling food prices from ethanol.

Given the growth in the number of poor people around the world, food will need to be affordable.

In theory, companies that compete in the marketplace will invest money to reduce costs. With subsidies there is no incentive to reduce costs.
Today there is no incentive for refiners to invest only to buy.
If refiners are mandated to buy ethanol but receive no subsidies they are likely buy ethanol plants and invest in them to reduce the cost of ethanol.

That was a long and baked in answer- I disagree firmly- your actual answer is in your last sentence but it bears no logic,at least to me. What you say is that Oil-refineries can make cheaper corn-ethanol than those folks that already are doing it- where do you get that from ?

It's also like saying ; if you run a poultry , you also need run a corn field (food for chicken)- which with all due respect is rubbish. They can just buy these mandated corn-stuffs from a third party - just like all sort of businesses are doing all over the world on a daily basis, here referring to raw-materials and other sub-contractor deliveries...

What you say is that Oil-refineries can make cheaper corn-ethanol than those folks that already are doing it- where do you get that from ?

Its called 'vertical integration'.

You may not believe it, but this is how business works.

Oil industry
Oil companies, both multinational (such as ExxonMobil, Royal Dutch Shell, ConocoPhillips or BP) and national (e.g. Petronas) often adopt a vertically integrated structure. This means that they are active along the entire supply chain from locating crude oil deposits, drilling and extracting crude, transporting it around the world, refining it into petroleum products such as petrol/gasoline, to distributing the fuel to company-owned retail stations, for sale to consumers.


Most businesses exist due to subcontractor services- not in spite of them. I believe that the oil-biz is vertical enough as it is - so for them to turn farmer/moonshine makers will make little or no sense at all- and in particular since they can send the extra expenditure straight onwards to the final consumers.Or are you maybe afraid that people will stop driving cars due to that extra cost?
.... thus your claim that oil co's can make cheaper ethanol is simply just your claim, nothing more. The final cost is controlled by the "Second Law", since the technology and procedure is well known by now, over the 'centuries'.We shall se..

I think the evidence here supports Majorian. Valero has bought up about ten ethanol distilleries now, and has over 1 bn gal/yr capacity (about 9% of US capacity). Their reasons? well, we can speculate, but I would say that they can see a possibility that the blender's credit won't be renewed, and that, if they are mandated to use it, it is in their interest to control their supply of ethanol. What happens if ethanol is in short supply but you have to meet the mandate? - the price gets bid up, and you go backwards. Can't happen if you own your own distillery capacity.

Same reason as why China is buying oil properties all over the world - they control their supply, and can't be outbid for it.

Now for Valero, if need be, they can distill grain instead of corn, or cellulosic if it finally succeeds. But regardless of the feedstock, the distillery is always the bottleneck, hence their desire to own them, subsidy or no subsidy.

I was hooked up on Majorians claim telling that oil-refineries "could reduce the cost of ethanol". I simply can't spot that link. Valero's justification for buying ethanol plants can be for 'any' reason , if you ask me. But in the bigger scheme of things ethanol will follow some sort of market price- and in particular in the land of the free where daily life cannot be negotiated. 'BAU up until BRW (Brick wall)' seems to be the order of the day..

Robert -- No one can really answer for "them" but what I recall many of the "subsidies" were in fact various tax deductions similar to those other industries receive. I've seen some refer to the price the gov't charges to lease/produce oil/NG from federal lands to be less then they should be and are thus a subsidy. OTOH royalties paid by companies on those lease amount to many billions of $'s/year. Much seems to be in the eye of the beholder.

I agree, and the other thing people fail to mention is that the oil companies pay huge taxes. If you add up the balance sheet between ethanol and oil, you will find it very lopsided as far as money flow into or out of government coffers.

And then the oil company owners are taxed again on the dividends and any gains.

Unfortunately soundbites have a great deal to do with our energy illiteracy because large concepts are distilled to a frame that rarely captures the complexity of an issue, e.g. "energy independence," "drill baby drill," and "peak oil." Yes, we need better frames but it is very difficult to replace one frame with another.

And unfortunately we live in as Debbie Cook puts it,a society in which policy is made on the basis of relationships rather than facts.

Witness the C-17, the Air Force doesn't need any more, the Pentagon doesn't want to buy any more, but subcontracts for the various pieces have been awarded in about 40 or so congressional districts so they are still being built.

Unfortunately I believe that whileyou have done a very creditable job of making your point, neither you nor any one else is likely to succeed in reducing it to a sound bite.

Here's your sound bite: "Mandating ethanol while also subsidizing it is like paying people to stop at stop signs."

The reason is that the mandate is already the law. Blenders pay fines if they don't meet the mandates. So what is the point of also paying them to meet the mandate?

My hat is off to you, Sir, your wit is as your name.

I found the argument quite confusing. Which mandate is he talking about? Is this the state-by-state mandates for oxygenated fuels? Is he talking about the 'Technology mandate' for advanced biofuels with no teeth, but a way for DOE to talk up all the wonderful research that never makes it to mass production?

Iowa, probably the largest corn ethanol producer in the world, has no mandate.. When I pull up to most pumps here, There is regular gasoline (no oxygenate), with 87 octane, then mid-grade *with* ethanol, at 89 or 90 octane, and then high grade 92 octane (usually without ethanol)

He's right there are some serious problems. Part of ethanol's problem seems to be some sort of hysteria that it's 'bad' by a lot of people who I expect have never spent any time on any sort of farm operation. The other is that UL listing for blender pumps have taken so long. We like free markets here, why can't we have blender pumps at every gas station and let consumers choose any ratio from 0% to 50%, and let the market sort it out.

Get rid of the subsidy, and put that money into a free blender pump install program. Peak oil problem solved.. Supply/demand will sort out the numbers. (Hopefully someday every gas station will have a synthetic gasoline tank, an ethanol tank, and a butanol tank, with 3-way blender pumps)

What do all of you drive? What do you fill up with? I am disturbed by how many people talk about the impending crash for peak oil, yet don't realize that every time they fill up they perpetuate the problem they spend so much ink (or bits on a blog) on. Personally, I fill up my 2001 Toyota Prius at a blender pump with 50% ethanol whenever I can. I am getting somewhere around 65 to 70 miles per gallon of gasoline, with the rest of the energy coming from ethanol, of which roughly 1/3 is from Ammonia fertilizer, 1/3 is from ethanol distillation, and 1/3 is just plain renewable.

Here in Ames, Iowa, there's company called frontline bioenergy, that makes biomass gasifiers for ethanol plants... to replace the 1/3 energy from distillation. I'm currently working for http://freedomfertilizer.com to solve the 1/3 from ammonia. And if Syngest ever gets their biomass to ammonia plant built we will have two non-fossil ammonia sources.

I also saw some comment about oil-company vertical integration into distilleries and farming. Farmers can vertically integrate as well. Within the next 5 or 10 years I plan to have a zero energy input agricultural operation with on-farm owned wind turbines, small-scale ethanol distillation, and the ability to sell whichever commodity (corn, soybeans, ethanol, canola, bio-oil, or raw stalk biomass) that gets me the best *sustainable* return on my investment.

I found the argument quite confusing. Which mandate is he talking about? Is this the state-by-state mandates for oxygenated fuels? Is he talking about the 'Technology mandate' for advanced biofuels with no teeth, but a way for DOE to talk up all the wonderful research that never makes it to mass production?

The Renewable Fuel Standard (RFS) is a federal mandate for gasoline blenders to put at least a specific amount of ethanol into their fuel supply. Last year that amounted to 10.5 billion gallons. And that mandate has teeth in the form of EPA fines for non-compliance. Believe me, no refiner wants the EPA on their back.

Iowa, probably the largest corn ethanol producer in the world, has no mandate..

Iowa the state may not have a specific mandate (some do and some don't), but refiners who are selling gasoline in Iowa must still meet their mandate. If they sell a lot of E85, then they can also sell gasoline with no ethanol. At the end of the day though, the number of gallons of gasoline sold dictate just how much ethanol had to be used based on a percentage of the overall volume.

I've always respected Robert's ability to explain complex issues so that non-experts can understand, but without oversimplifying.

I think that this argument is sound, though I wouldn't make it without being clear that I disagree with the mandates also.

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EtOH production is now a bit more than 765,000 bbls/day. On an energy content basis, this is close to 500,000 bbls/day of gasoline. If the EtOH production was to stop and throw a lot of rural America into another depression, we would need to import this gasoline from abroad, or else convert natural gas into gasoline (also possible, such as occurs in New Zealand via the MTG process). Since 1000 cf of Ngas could make about (or less than) 6.2 gallons (39#) of gasoline, or about 0.148 bbl of gasoline, lots of Ngas would be needed to make 500,000 bbls/day. Since 6737 cubic feet of Ngas is needed to make 1 bbl of gasoline, about 3.37 billion cubic feet/day of Ngas (or more) is needed to make these 500,000 bbls/day of gasoline. That's about 5% of current consumption - no wonder T.B. Pickens likes the idea, or ones similar to this one. That 5% increase in demand for Ngas would do wonders to raise prices for Ngas, and raise the value of Picken's assets something fierce.

But, if we don't convert Ngas into gasoline, we would either have to import this gasoline, or about 1 million bbls/day of crude oil (maybe more for crappy grades of oil). Since only about 43 mbd of crude oil is available for export, that's about 2.5% of world exportable oil, and a significant uptick in demand.

What would a 2.5% increase in oil demand do for world oil prices right now? Would it raise the world oil price by about $25/bbl, now or in the near future? Probably. Maybe this would get us to $100/bbl oil after a while.

Anyway, to import 1 mbbl/day (it certainly will not be produced form the US any more) of oil would cost the US roughly $36 billion/yr @ $100/bbl. And the extra cost on the ~ 12 mbd going from $75 to $100/bbl, were that to occur, would be another $110 billion flushed out of the country. Ouch. And $100/bbl would not be good for the fragile US and world economy right now.

Of course, not using the oil in the first place would be the way to go - as would putting a $25/bbl import fee on oil (and thus collecting $110 billion/yr) in govt tax revenues make more sense as a way to discourage the use of those petroleum derivatives. The higher price would eventually discourage driving (less miles traveled and/or more use of higher efficiency vehicles) somewhat, but that's about as popular with spineless politicians as is putting child porno distributors in charge of the local PTA fund-raising committee.

Another way to make EtOH less subsidized is to put a gasoline tax on non-renewable hydrocarbons, and no tax on the EtOH, as well as import fees on imported petroleum. But again, not a popular thing to do, especially in an election year.

So, the compromise is the $6 billion/yr in subsidy to the 11 billion gal/yr of home grown EtOH made (soon to be 14 billion gal/yr). In retrospect, that subsidy may be distasteful, may be cowardly, but it beats throwing a probable $146 billion a year in non-existent foreign reserves of money down the rat-hole to some wretched cleptocracies like Equatorial Guinea, Nigeria, Libya and Somolia. And IraqNam, too.


In retrospect, that subsidy may be distasteful, may be cowardly, but it beats throwing a probable $146 billion a year...

You miss the entire point. We already have mandates. The subsidy doesn't help us blend one more gallon of ethanol than is already required by law. Getting rid of it would not eliminate the mandate. So how exactly could getting rid of it lead to the scenario you describe? We would still be blending the same amount of ethanol as before.

Except you forgot to figure in how much ENERGY it takes to make ethanol. I've always been under the impression they use large amounts of natural gas to produce the ethanol. Maybe they have switched to other sources? In my eyes ethanol is pointless, except maybe as fuel for future tractors/trucks. The cure is to do away with private transportation now instead of in the future when the market will force people into not driving. I will admit i'd rather burn corn in my car engine then eat it in my food!

The problem of conflicting requirements comes up in other contexts such as
- an absolute CO2 cap combined with a percentage renewables target
- a feed-in tariff (ie cash subsidy) for wind or solar combined with a target in megawatt hours.

Generally one requirement makes the other redundant or 'non binding' in the language of constrained optimisation. In the case of Euro windpower it gives rise to 'negative prices' whereby the generator pays the electricity seller (not vice versa) to take the electricity in order to keep the subsidy going.

I wonder if it is possible to draw a price vs quantity diagram to illustrate the ethanol case. You have a straight line for the quantity target in gallons due to the blending quota. Superimposed you have two supply curves, a lower priced curve with the tax credit and a higher priced curve without. Who pays and who pockets the difference?

Looks like I struck a nerve with the ethanol lobby:


And you got some awfully high-powered concurring opinion:

Study Finds Government Mandates Superior to All Other Biofuels Policies, But Mixing With Subsidies Causes Adverse Effects; The Argument for a Direct CO2 Tax

When used in some combinations, biofuel policies can be contradictory, where the effects of a policy are reversed. These biofuel policies never complement each other, but can on rare occasions be complementary to energy or environmental policy. Rarely does a biofuel policy have a neutral effect.

The effects of each biofuel policy and their interaction with other policies (biofuel or otherwise) are very complex, the economics of which can seem impenetrable. This is due to the intricate interrelationships between energy and commodity markets and the varied environmental consequences. Nevertheless, in this paper we disentangle the key interactions in this byzantine system of policy instruments by analyzing each biofuel policy on its own merits, in relation to each other, as well as to other environmental, energy and agricultural policies. As complex as the economics are, however, once understood, a set of relatively clear policy implications emerge.
That's going to leave a mark. (h/t GCC)

I concur with RR. The subsidy should be scrapped.

But digging deeper into the de Gorter and Lust paper you highlight...

"Tax credits by themselves encourage ethanol production as a replacement for gasoline consumption. But with mandates in place, the tax credits will unintentionally subsidize gasoline consumption instead. This contradicts the new energy bill's stated objectives of reducing dependency on oil..."

Also of note:

"The award winning study by Abbott, Hurt, and Tyner (2008) determined that oil prices caused 75% of the corn price hike and 25% was due to biofuel policy."

"Sustainability standards are impossible to measure." re: Searchinger et al (2008), which de Gorter and Lust further destroy with "Expanding LCA (life-cycle accounting) to account for all indirect changes should also mean measuring the indirect effects in the oil sector, for example the direct and indirect effects of oil pollution in the Ecuadorian jungle, or the indirect emissions from military expenditures to protect gasoline produced from Middle East petroleum."

Overall... a well written piece. However, there is one particular instance where de Gorter and Lust are DEAD WRONG:

"Any biofuel sustainability standard should be based on inter-temporal cost-benefit analysis used in the context of global climate change economics."

Biofuel policy should be measured first and foremost by 1) PIR petroleum input ratio; 2) EROEI; 3) environmental impact i.e. degredation of our air, water and land resource base.

But with mandates in place, the tax credits will unintentionally subsidize gasoline consumption instead.

I hadn't seen that article prior to writing mine (and in fact have been beating this drum ever since we got the mandates), but that is my point exactly. What the subsidies now do is artificially depress the price of gasoline slightly, and every taxpayer pays the price.

Correct. And if we were to dig into the TOD archives... I think we would find a prior exchange on the subject matter wherein I agreed with your assertions re: subsidy removal.

That said, I think we would also find my assertions re: renewable fuel mandates as a necessary tool for peak oil mitigation.

In other words... the boys are Oxford are still playing catch up ;)

Yeah! You,"Tax Raising", "Job Killer", you! You destroyer of "Green" Corn Businesses, How ever do you sleep at night?! ;-)

Thanks for an informative and well reasoned article.

IMO, ethanol is what it is-a boondoggle and smokescreen, an excuse for us to avoid even making an attempt to wean ourselves off the ICE. But, our exurban McMansions and SUVs are "nonnegotiable."

Ethanol = Pork = Votes.